SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission file number 1-9447
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3030279
(State of incorporation) (I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057-3010
(Address of principal executive offices) (Zip Code)
(713) 267-3777
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes x No
At October 31, 1996, the registrant had 71,646,389 shares of common
stock outstanding.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
September 30, December 31,
1996 1995
--------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 21.6 $ 21.9
Receivables 261.6 308.6
Inventories 545.5 525.7
Prepaid expenses and other current assets 111.7 76.6
------------------------------
Total current assets 940.4 932.8
Investments in and advances to unconsolidated
affiliates 174.6 178.2
Property, plant, and equipment - net 1,126.4 1,109.6
Deferred income taxes 284.7 269.1
Other assets 343.1 323.5
------------------------------
Total $ 2,869.2 $ 2,813.2
==============================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 160.5 $ 184.5
Accrued interest 13.6 32.0
Accrued salaries, wages, and related
expenses 64.9 105.3
Accrued postretirement medical benefit
obligation - current portion 46.8 46.8
Other accrued liabilities 151.7 129.4
Payable to affiliates 95.6 94.2
Long-term debt - current portion 8.9 8.9
------------------------------
Total current liabilities 542.0 601.1
Long-term liabilities 558.3 548.5
Accrued postretirement medical benefit
obligation 727.7 734.0
Long-term debt 858.4 749.2
Minority interests 119.4 122.7
Stockholders' equity:
Preferred stock .4 .4
Common stock .7 .7
Additional capital 530.8 530.3
Accumulated deficit (454.7) (459.9)
Additional minimum pension liability (13.8) (13.8)
------------------------------
Total stockholders' equity 63.4 57.7
------------------------------
Total $ 2,869.2 $ 2,813.2
==============================
The accompanying notes to interim consolidated financial statements
are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
(In millions of dollars, except per share amounts)
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1996 1995 1996 1995
------------------------------ ------------------------------
Net sales $ 553.4 $ 550.3 $ 1,652.1 $ 1,646.7
------------------------------ ------------------------------
Costs and expenses:
Cost of products sold 485.0 439.3 1,394.8 1,329.8
Depreciation 24.3 23.7 72.5 71.1
Selling, administrative,
research and development,
and general 33.6 34.1 97.4 96.4
------------------------------ ------------------------------
Total costs and
expenses 542.9 497.1 1,564.7 1,497.3
------------------------------ ------------------------------
Operating income 10.5 53.2 87.4 149.4
Other income (expense):
Interest expense (22.6) (23.9) (68.3) (71.3)
Other - net 2.1 (7.7) 3.0 (9.8)
------------------------------ ------------------------------
Income (loss) before income taxes
and minority interests (10.0) 21.6 22.1 68.3
Credit (provision) for income taxes 3.8 (7.8) (8.4) (24.6)
Minority interests (.4) (1.3) (2.2) (4.4)
------------------------------ ------------------------------
Net income (loss) (6.6) 12.5 11.5 39.3
Dividends on preferred stock (2.1) (4.9) (6.3) (15.5)
------------------------------ ------------------------------
Net income (loss) available to
common shareholders $ (8.7) $ 7.6 $ 5.2 $ 23.8
============================== ==============================
Earnings (loss) per common and
common equivalent share:
Primary $ (.12) $ .13 $ .07 $ .40
============================== ==============================
Fully diluted $ .14 $ .46
============== ==============
Weighted average common and common
equivalent shares outstanding
(000):
Primary 71,646 60,225 71,843 59,015
Fully diluted 71,782 71,613
The accompanying notes to interim consolidated financial statements
are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
Nine Months Ended
September 30,
------------------------------
1996 1995
------------------------------
Cash flows from operating activities:
Net income $ 11.5 $ 39.3
Adjustments to reconcile net income to net
cash provided by (used for) operating
activities:
Depreciation 72.5 71.1
Amortization of excess investment over
equity in net assets of
unconsolidated affiliates 8.7 8.7
Amortization of deferred financing costs
and discount on long-term debt 4.1 4.1
Equity in income of unconsolidated
affiliates (7.5) (17.2)
Minority interests 2.2 4.4
Decrease (increase) in receivables 41.0 (86.6)
Increase in inventories (19.8) (62.6)
(Increase) decrease in prepaid expenses
and other assets (38.1) 70.5
Decrease in accounts payable (24.1) (5.2)
Decrease in accrued interest (18.4) (18.0)
(Decrease) increase in payable to
affiliates and accrued liabilities (23.1) 12.3
Decrease in accrued and deferred income
taxes (18.6) (8.5)
Other 4.6 7.8
------------------------------
Net cash (used for) provided by
operating activities (5.0) 20.1
------------------------------
Cash flows from investing activities:
Net proceeds from disposition of property and
investments 1.6 6.9
Expenditures for property, plant, and
equipment (90.8) (44.2)
Investments in unconsolidated affiliates (.3) (9.0)
Redemption fund for minority interests'
preference stock (1.3) (.2)
------------------------------
Net cash used for investing
activities (90.8) (46.5)
------------------------------
Cash flows from financing activities:
Borrowings (repayments) under revolving credit
facility, net 118.1 55.6
Repayments of long-term debt (9.0) (8.5)
Incurrence of financing costs (.8)
Dividends paid (8.4) (18.7)
Capital stock issued 1.2
Redemption of minority interests' preference
stock (5.2) (8.8)
------------------------------
Net cash provided by financing
activities 95.5 20.0
------------------------------
Net decrease in cash and cash equivalents during
the period (.3) (6.4)
Cash and cash equivalents at beginning of period 21.9 17.6
------------------------------
Cash and cash equivalents at end of period $ 21.6 $ 11.2
==============================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 82.7 $ 85.2
Income taxes paid 22.4 26.6
Tax allocation payments to MAXXAM Inc. 1.1
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except prices and per share amounts)
1. GENERAL
Kaiser Aluminum Corporation (the "Company") is a subsidiary of MAXXAM
Inc. ("MAXXAM"). MAXXAM owns approximately 62% of the Company's common
stock, assuming the conversion of each outstanding share of 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES"), into one share of the Company's
common stock, with the remaining approximately 38% publicly held. The
Company operates through its subsidiary, Kaiser Aluminum & Chemical
Corporation ("KACC").
The foregoing unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X as promulgated by the Securities and
Exchange Commission. Accordingly, these financial statements do not
include all of the disclosures required by generally accepted accounting
principles for complete financial statements. These unaudited interim
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31,
1995. In the opinion of management, the unaudited interim consolidated
financial statements furnished herein include all adjustments, all of which
are of a normal recurring nature, necessary for a fair statement of the
results for the interim periods presented.
Operating results for the quarter and the nine month period ended
September 30, 1996, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1996.
2. INVENTORIES
The classification of inventories is as follows:
September 30, December 31,
1996 1995
-----------------------------
Finished fabricated aluminum products $ 108.4 $ 91.5
Primary aluminum and work in process 190.0 195.9
Bauxite and alumina 122.5 119.6
Operating supplies and repair and maintenance
parts 124.6 118.7
-----------------------------
Total $ 545.5 $ 525.7
=============================
Substantially all product inventories are stated at last-in, first-out
(LIFO) cost, not in excess of market. Replacement cost is not in excess of
LIFO cost.
3. EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Primary - Earnings (loss) per common and common equivalent share are
computed by deducting preferred stock dividends from net income (loss) in
order to determine net income (loss) available to common shareholders.
This amount is then divided by the weighted average number of common and
common equivalent shares outstanding during the period. The weighted
average number of common and common equivalent shares for the quarter ended
September 30, 1996, excludes the impact of outstanding stock options since
they were antidilutive. The impact of outstanding stock options on the
weighted average number of common and common equivalent shares for the
quarter and nine months ended September 30, 1995, and the nine months ended
September 30, 1996, was immaterial.
Fully Diluted - The PRIDES were excluded from the calculation of the
weighted average number of common and common equivalent shares outstanding
for all periods presented because they were antidilutive. For the quarter
and nine months ended September 30, 1995, dividends of $2.8 and $9.1,
respectively, attributable to the Company's Mandatory Conversion Premium
Dividend Preferred Stock (the "Series A Shares") which were exchanged for
approximately 13.1 million shares of the Company's common stock and certain
cash payments on September 19, 1995, have not been deducted from net income
and the weighted average number of common and common equivalent shares
outstanding have been adjusted to reflect the shares of common stock issued
in the exchange as if they had been outstanding for the entire periods. As
a result of the conversion of the Series A Shares, fully diluted earnings
per share for the 1995 periods are presented even though the results are
antidilutive.
4. CONTINGENCIES
Environmental Contingencies - The Company and KACC are subject to a
number of environmental laws, to fines or penalties assessed for alleged
breaches of the environmental laws, and to claims and litigation based upon
such laws. KACC currently is subject to a number of lawsuits under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended by the Superfund Amendments Reauthorization Act of 1986
("CERCLA"), and, along with certain other entities, has been named as a
potentially responsible party for remedial costs at certain third-party
sites listed on the National Priorities List under CERCLA.
Based upon the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. At September 30, 1996, the balance of such accruals,
which is primarily included in Long-term liabilities, was $32.9. These
environmental accruals represent the Company's estimate of costs reasonably
expected to be incurred based on presently enacted laws and regulations,
currently available facts, existing technology, and the Company's
assessment of the likely remediation action to be taken. The Company
expects that these remediation actions will be taken over the next several
years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $2.0 to $10.0 for the years
1996 through 2000 and an aggregate of approximately $7.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in these and
other factors may result in actual costs exceeding the current
environmental accruals. The Company believes that it is reasonably
possible that costs associated with these environmental matters may exceed
current accruals by amounts that could range, in the aggregate, up to an
estimated $26.5 and that the factors upon which a substantial portion of
this estimate is based are expected to be resolved in early 1997. While
uncertainties are inherent in the final outcome of these environmental
matters, and it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the
resolution of such uncertainties should not have a material adverse effect
on the Company's consolidated financial position, results of operations, or
liquidity.
Asbestos Contingencies - KACC is a defendant in a number of lawsuits,
some of which involve claims of multiple persons, in which the plaintiffs
allege that certain of their injuries were caused by, among other things,
exposure to asbestos during, and as a result of, their employment or
association with KACC or exposure to products containing asbestos produced
or sold by KACC. The lawsuits generally relate to products KACC has not
manufactured for at least 15 years. At September 30, 1996, the number of
such lawsuits pending was approximately 75,900, as compared to 59,700 at
December 31, 1995. During the year 1995, approximately 41,700 of such
claims were received and 7,200 were settled or dismissed. During the
quarter and nine months ended September 30, 1996, approximately 4,600 and
20,000 of such claims were received and 600 and 3,800 were settled or
dismissed, respectively.
Based on past experience and reasonably anticipated future activity,
the Company has established an accrual for estimated asbestos-related costs
for claims filed and estimated to be filed and settled through 2008. There
are inherent uncertainties involved in estimating asbestos-related costs,
and the Company's actual costs could exceed these estimates. The Company's
accrual was calculated based on the current and anticipated number of
asbestos-related claims, the prior timing and amounts of asbestos-related
payments, and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A.
with respect to the current state of the law related to asbestos claims.
Accordingly, an estimated asbestos-related cost accrual of $160.0, before
consideration of insurance recoveries, is included primarily in Long-term
liabilities at September 30, 1996. The Company estimates that annual
future cash payments in connection with such litigation will be
approximately $13.0 to $20.0 for each of the years 1996 through 2000, and
an aggregate of approximately $78.0 thereafter through 2008. While the
Company does not presently believe there is a reasonable basis for
estimating such costs beyond 2008 and, accordingly, no accrual has been
recorded for such costs which may be incurred beyond 2008, there is a
reasonable possibility that such costs may continue beyond 2008, and such
costs may be substantial.
A substantial portion of the asbestos-related claims that were filed
and served on KACC during 1995 and 1996 were filed in Texas. KACC has been
advised by its counsel that, although there can be no assurance, the
increase in pending claims may have been attributable in part to tort
reform legislation in Texas. Although asbestos-related claims are
currently exempt from certain aspects of the Texas tort reform legislation,
management has been advised that efforts to remove the asbestos-related
exemption in the tort reform legislation, relating to the doctrine of forum
non conveniens, as well as other developments in the legislative and legal
environment in Texas, may be responsible for the accelerated pace of new
claims experienced in late 1995 and its continuance in 1996, albeit at a
somewhat reduced rate.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. Claims for
recovery from some of KACC's insurance carriers are currently subject to
pending litigation and other carriers have raised certain defenses, which
have resulted in delays in recovering costs from insurance carriers. The
timing and amount of ultimate recoveries from these insurance carriers are
dependent upon the resolution of these disputes. The Company believes,
based on prior insurance-related recoveries in respect of asbestos-related
claims, existing insurance policies, and the advice of Thelen, Marrin,
Johnson & Bridges with respect to applicable insurance coverage law
relating to the terms and conditions of those policies, that substantial
recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $142.3, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily in Other
assets at September 30, 1996.
Management continues to monitor claims activity, the status of the
lawsuits (including settlement initiatives), legislative progress, and
costs incurred in order to ascertain whether an adjustment to the existing
accruals should be made to the extent that historical experience may differ
significantly from the Company's underlying assumptions. While
uncertainties are inherent in the final outcome of these asbestos matters
and it is presently impossible to determine the actual costs that
ultimately may be incurred and insurance recoveries that will be received,
management currently believes that, based on the factors discussed in the
preceding paragraphs, the resolution of the asbestos-related uncertainties
and the incurrence of asbestos-related costs net of related insurance
recoveries should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
Other Contingencies - The Company and KACC are involved in various
other claims, lawsuits, and other proceedings relating to a wide variety of
matters. While uncertainties are inherent in the final outcome of such
matters, and it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the
resolution of such uncertainties and the incurrence of such costs should
not have a material adverse effect on the Company's consolidated financial
position, results of operations, or liquidity.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
The Company's earnings are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also depend
to a significant degree upon the volume and mix of all products sold. KACC
enters into primary aluminum hedging transactions from time to time in the
normal course of business. Primary aluminum hedging transactions are
designed to mitigate the Company's exposure to declines in the market price
of primary aluminum, while retaining the ability to participate in
favorable environments that may materialize. KACC has employed strategies
which include forward sales and purchases of primary aluminum at fixed
prices and the purchase or sale of options for primary aluminum. At
September 30, 1996, KACC had sold forward, at fixed prices, approximately
69,000 and 93,600 tons* of primary aluminum in excess of its projected
internal fabrication requirements for 1997 and 1998, respectively, and had
purchased put options to establish a minimum price for 66,000 and 45,000
tons of such 1997 and 1998 surplus, respectively. During October 1996,
KACC purchased put options to establish a minimum price for an additional
126,000 tons of primary aluminum in excess of its projected 1997 internal
fabrication requirements and entered into options contracts that
established a price range for an additional 48,000 tons of the Company's
1998 surplus.
In addition, at September 30, 1996, KACC had sold forward
approximately 73% and 85% of the alumina available to it in excess of its
projected internal smelting requirements for 1997 and 1998, respectively.
Virtually all of such 1997 and 1998 sales were made at prices indexed to
future prices of primary aluminum.
From time to time, KACC also enters into forward purchase and option
transactions to limit its exposure to increases in natural gas and fuel oil
costs. As of September 30, 1996, KACC had option contracts for the
purchase of approximately 40,000 MMBtu of natural gas per day during the
first quarter of 1997, and a combination of fixed price purchase and option
contracts for 20,000 MMBtu of natural gas per day for the period April 1997
to December 1998. At September 30, 1996, KACC also held option contracts
for 54,000 barrels of fuel oil per month for the period January 1997
through December 1998.
KACC also enters into hedging transactions in the normal course of
business that are designed to reduce its exposure to fluctuations in
foreign exchange rates. At September 30, 1996, KACC had net forward
foreign exchange contracts totaling approximately $81.6 for the purchase of
110.0 Australian dollars from January 1997 through June 1998, in respect of
its commitments for 1997 and 1998 expenditures denominated in Australian
dollars.
At September 30, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price of
$1,481 per ton ($.67 per pound) of primary aluminum, natural gas and fuel
oil forward purchase and option contracts, and forward foreign exchange
contracts, was approximately $46.4.
- ------------------
*All references to tons in this report refer to metric tons of 2,204.6
pounds.
See Note 9 of the Notes to Consolidated Financial Statements for the
year ended December 31, 1995.
6. SUBSEQUENT EVENTS
On October 23, 1996, (the "Issuance Date"), KACC completed an offering
(the "Offering") of $175.0 principal amount of 10 7/8% Senior Notes due
2006 (the "10 7/8% Senior Notes") at 99.5% of their principal amount to
yield 10.96% at maturity. The 10 7/8% Senior Notes were not registered
under the Securities Act of 1933, and may not be offered or sold in the
United States absent registration or an applicable exemption from
registration requirements. The 10 7/8% Senior Notes rank pari passu with
outstanding indebtedness under KACC's Credit Agreement dated as of February
15, 1994, as amended (the "Credit Agreement") and KACC's 9 7/8% Senior
Notes due 2002 (the 9-7/8% Senior Notes) in right and priority of payment
and are guaranteed on a senior, unsecured basis by certain of the Company's
subsidiaries (the "Subsidiary Guarantors"). Net proceeds from the Offering
on the Issuance Date, after estimated expenses, were approximately $168.9,
of which $91.7 were utilized to reduce the outstanding borrowings under the
revolving credit facility of the Credit Agreement to zero. The remaining
net proceeds (approximately $77.2) were invested in short-term investments
pending their application for working capital and general corporate
purposes, including capital projects. Pursuant to an agreement with the
initial purchasers of the 10 7/8% Senior Notes, KACC and the Subsidiary
Guarantors agreed to file a registration statement (the "Registration
Statement") with the Securities & Exchange Commission within 30 days of the
Issuance Date with respect to a registered offer to exchange the 10 7/8%
Senior Notes for new notes with substantially identical terms (the
"Exchange Offer"), and to use their reasonable best efforts to have the
Registration Statement declared effective within 90 days of the Issuance
Date and the Exchange Offer consummated within 130 days of the Issuance
Date. The Exchange Offer will be made only by means of a prospectus.
On a pro forma basis, at September 30, 1996, after giving effect to
the Offering and the application of proceeds therefrom, the Company's total
consolidated indebtedness would have increased from $867.3 to $910.2,
borrowing capacity of $273.1 would have been available for use under the
Credit Agreement and the Company would have had available additional cash
proceeds from the Offering of $37.7.
During October 1996, the Credit Agreement was amended to, among other
things, provide for the Offering of the 10 7/8% Senior Notes discussed
above and to modify certain of the financial covenants contained in the
Credit Agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following should be read in conjunction with the response to Item
1, Part I, of this Report.
Management's Discussion & Analysis of Financial Condition and Results
of Operations, ("MD&A") contains statements which constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements appear in a number of places in the
MD&A and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers primarily with
respect to the future operating performance of the Company. Readers are
cautioned that any such forward looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements
as a result of various factors. The accompanying MD&A identifies important
factors that could cause such differences.
RESULTS OF OPERATIONS
The Company's operating results are sensitive to changes in prices of
alumina, primary aluminum, and fabricated aluminum products, and also
depend to a significant degree on the volume and mix of all products sold
and on KACC's hedging strategies. See Note 5 of the Notes to Interim
Consolidated Financial Statements for an explanation of KACC's hedging
strategies. The table on the following page provides selected operational
and financial information on a consolidated basis with respect to the
Company for the quarters and nine month periods ended September 30, 1996
and 1995. As an integrated aluminum producer, the Company uses a portion
of its bauxite, alumina, and primary aluminum production for additional
processing at certain of its other facilities. Intracompany shipments and
sales are excluded from the information set forth on the following page.
Interim results are not necessarily indicative of those for a full
year.
SELECTED OPERATIONAL AND FINANCIAL INFORMATION
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------------------------- --------------------------------
(In millions of dollars, except shipments, prices, and per share amounts)
Shipments: (1)
Alumina 598.6 471.5 1,506.7 1,494.6
Aluminum products:
Primary aluminum 88.1 73.0 262.9 184.5
Fabricated aluminum
products 83.1 90.4 245.4 284.3
-------------------------------- --------------------------------
Total aluminum
products 171.2 163.4 508.3 468.8
================================ ================================
Average realized sales price:
Alumina (per ton) $ 187 $ 206 $ 199 $ 203
Primary aluminum (per pound) .67 .83 .69 .82
Net sales:
Bauxite and alumina:
Alumina $ 111.7 $ 97.2 $ 300.2 $ 303.8
Other (2) (3) 25.8 22.3 77.2 65.3
-------------------------------- --------------------------------
Total bauxite and
alumina 137.5 119.5 377.4 369.1
-------------------------------- --------------------------------
Aluminum processing:
Primary aluminum 130.6 133.4 402.8 335.0
Fabricated aluminum
products 282.4 293.0 861.4 929.0
Other (3) 2.9 4.4 10.5 13.6
-------------------------------- --------------------------------
Total aluminum
processing 415.9 430.8 1,274.7 1,277.6
-------------------------------- --------------------------------
Total net sales $ 553.4 $ 550.3 $ 1,652.1 $ 1,646.7
================================ ================================
Operating income (loss):
Bauxite and alumina $ (2.1) $ 14.8 $ 8.8 $ 36.4
Aluminum processing 29.1 58.9 127.8 170.9
Corporate (16.5) (20.5) (49.2) (57.9)
-------------------------------- --------------------------------
Total operating income $ 10.5 $ 53.2 $ 87.4 $ 149.4
================================ ================================
Net income (loss) $ (6.6) $ 12.5 $ 11.5 $ 39.3
================================ ================================
Capital expenditures:
Property, plant, and equipment $ 39.1 $ 17.1 $ 90.8 $ 44.2
Investments in unconsolidated
affiliates .1 9.0 .3 9.0
-------------------------------- --------------------------------
Total capital
expenditures $ 39.2 $ 26.1 $ 91.1 $ 53.2
================================ ================================
____________________________________
(1) In thousands of tons.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests in
consolidated subsidiaries.
Recent Trends and Developments
During 1995, the average Midwest U.S. transaction price (the "AMT
Price") for primary aluminum was approximately $.86 per pound compared to
$.72 and $.54 per pound in 1994 and 1993, respectively. The significant
improvement in prices during 1994 and 1995 resulted from strong growth in
Western world consumption of aluminum and the curtailment of production in
response to lower prices in prior periods by many producers worldwide. In
1995, production of primary aluminum increased and consumption of aluminum
continued to grow, but at a much lower rate than in 1994. In general, the
overall aluminum market was strongest in the first half of 1995. By the
second half of 1995, orders and shipments for certain products had softened
and the rate of decline in London Metal Exchange ("LME") inventories had
leveled off. By the end of 1995, some small increases in LME inventories
occurred, and prices of aluminum weakened from first-half levels. This
trend has continued throughout the first ten months of 1996 as the supply
of primary aluminum exceeded demand during this period. Net reported
primary aluminum inventories have increased by approximately 230,000 tons
in 1996 based upon recent reports of the LME (through November 1, 1996) and
the International Primary Aluminum Institute (through August 31, 1996),
following substantial declines of 764,000 and 1,153,000 tons in 1994 and
1995, respectively. The AMT Price for primary aluminum for the week ended
November 1, 1996, was approximately $.68 per pound.
Increased production of primary aluminum due to restarts of certain
previously idled capacity, the commissioning of a major new smelter in
South Africa, and the continued high level of exports from the Commonwealth
of Independent States have contributed to increased supplies of primary
aluminum to the Western world in 1996. While the economies of the major
aluminum consuming regions - the United States, Japan, Western Europe, and
Asia - are performing relatively well, the Company believes that the
reduction of aluminum inventories by consumers, as prices have continued to
decline, has suppressed the growth in primary aluminum demand that normally
accompanies growth in economic and industrial activity. In addition to
these supply/demand dynamics, the Company believes the recent decline in
primary aluminum prices may have been influenced by a recent major decline
in copper prices on the LME.
Fourth Quarter Results
The Company expects to continue to sustain net losses in the fourth
quarter of 1996 due principally to lower average realized prices for
alumina and primary aluminum, as compared to prices realized in the fourth
quarter of 1995, and due to increased raw material, energy, and operational
costs associated with the production of alumina at the Company's Gramercy
alumina refinery and 65% owned Alpart alumina refinery in Jamaica, as
compared to amounts incurred in the fourth quarter of 1995. Such losses
could substantially exceed the loss for the third quarter of 1996 if the
price of primary aluminum does not increase from current levels.
Profit Enhancement and Cost Cutting Initiative
The Company has set a goal of achieving significant cost reductions
and other profit improvements during 1997, with the full effect planned to
be realized in 1998. The initiative is based on the Company's conclusion
that the current level of performance of its existing facilities and
businesses will not achieve the level of profits the Company considers
satisfactory based upon historic long-term average prices for primary
aluminum and alumina. To achieve this goal, the Company plans reductions
in production costs, improvements in operating efficiencies, decreases in
corporate selling, general and administrative expenses, and enhancements to
product mix. There can be no assurance that the initiative will result in
the desired cost reductions and other profit improvements.
Quarter and Nine Months Ended September 30, 1996 Compared to Quarter and
Nine Months Ended September 30, 1995
Summary - The Company reported a net loss of $6.6 million, or $.12 per
common share, for the third quarter of 1996, compared to net income of
$12.5 million, or $.13 per common share, for the same period of 1995. Net
sales in the third quarter of 1996 totaled $553.4 million compared to
$550.3 million in the third quarter of 1995. For the first nine months of
1996, the Company's net income was $11.5 million, or $.07 per share,
compared to net income of $39.3 million, or $.40 per common share, in the
first nine months of 1995. Net sales for the first nine months of 1996
were $1,652.1 million, compared to $1,646.7 million for the same period in
1995.
Results for the third quarter and nine months ended September 30, 1996,
reflect the substantial reduction in market prices for primary aluminum
more fully discussed above. Alumina prices, which are significantly
influenced by changes in primary aluminum prices, also declined from period
to period. The decrease in product prices more than offset the positive
impact of increases in shipments in several segments of the Company's
business, as more fully discussed below.
Results for the first nine months of 1995 include approximately $17.0
million of first-quarter 1995 pre-tax expenses associated with an eight-day
strike at five major U.S. locations, a six-day strike at the Company's
Alpart alumina refinery, and a four-day disruption of alumina production at
Alpart caused by a boiler failure.
Bauxite and Alumina - Net sales for this segment increased by 15% for the
quarter ended September 30, 1996, from the comparable period in the prior
year, as increased shipments of alumina (27%) more than offset a 9% decline
in prices realized from the sale of alumina. Net segment sales for the
nine months ended September 30, 1996, were basically unchanged from the
same period in 1995 as, on a year to date basis, nominal alumina price
declines were offset by a modest increase in alumina shipments. The
reduction in prices realized, particularly for the quarter ended September
30, 1996, reflects the substantial decline in primary aluminum prices
experienced in 1996 discussed above, as well as the impact of certain short
term sales of previously uncommitted alumina production.
Operating income (loss) for this segment of the Company's business declined
significantly from prior year periods as a result of: (1) reduced gross
margins from alumina sales resulting from the previously discussed price
declines; (2) high operating costs associated with disruptions in the power
supply at the Company's Alpart alumina refinery; and (3) increased natural
gas costs at the Company's Gramercy, Louisiana alumina refinery. Operating
income for the nine months ended September 30, 1996, was also unfavorably
impacted by a temporary raw material quality problem experienced at the
Company's Gramercy facility during the second quarter of 1996.
Aluminum Processing - Net sales of primary aluminum declined by only 2% for
the quarter ended September 30, 1996, from the comparable prior year period
as a 19% reduction in prices realized was substantially offset by a 21%
increase in shipments. For the first nine months of 1996 increases in
shipments of 42.5% more than offset a 16% decline in product prices from
period to period. The increases in shipments during the quarter and the
nine months ended September 30, 1996, are the result of increased shipments
of primary aluminum to third parties as a result of a decline in
intracompany transfers.
Net sales of fabricated aluminum products were down 4%
and 7% for the quarter and the nine months ended September 30, 1996,
respectively, as compared to prior year periods as a result of a decrease
in shipments (primarily related to can sheet activities) resulting from
reduced growth in demand and the reduction of consumer inventories
The impact of reducedproduct shipments was to a limited degree offset by
5% and 7% increases in prices realized from the sale of fabricated aluminum
products for the quarter and nine months ended September 30, 1996,
respectively, resulting from a shift in product mix (to higher-end value
added products), due to reduced can sheet shipments.
Corporate - Corporate operating expenses represent normal and recurring
corporate general and administrative expenses which are not allocated to
the Company's business segments.
LIQUIDITY AND CAPITAL RESOURCES
Capital Structure
In April 1996, the Company filed a shelf-registration statement with
the Securities and Exchange Commission (the "SEC") covering the sale by
MAXXAM of up to 10 million shares of the Company's Common Stock that are
owned by MAXXAM. There will be no proceeds to the Company from any such
sale. The registration has been declared effective by the SEC.
The Company's Board of Directors had approved a proposed
recapitalization (the "Proposed Recapitalization") which would, among other
things, (i) provide for two classes of common stock: Class A Common Shares
with one vote per share ("Class A Common Shares") and a new, lesser-voting
class designated as Common Stock with 1/10 vote per share ("Recap Common
Stock"); (ii) redesignate as Class A Common Shares the 100 million
currently authorized shares of the Company's existing Common Stock and
authorize an additional 250 million shares of Recap Common Stock; and (iii)
reclassify each issued share of the Company's existing Common Stock into
(a) .33 of a Class A Common Share and (b) .67 of a share of Recap Common
Stock.
On May 1, 1996, the Company's stockholders approved the Proposed
Recapitalization, but it was not implemented at that time due to a
preliminary injunction issued by the Delaware Court of Chancery. The
preliminary injunction was upheld on appeal by the Delaware Supreme Court
on August 29, 1996. The Company's Board of Directors subsequently adopted
a resolution abandoning the Proposed Recapitalization. The Company has
filed a motion with the Delaware Court of Chancery to dismiss the
shareholder litigation relating to the Proposed Recapitalization on the
ground of mootness and has filed a response to plaintiffs' motion for entry
of a permanent injunction. The Court has not ruled on either motion. See
Part II, Item 1. "LEGAL PROCEEDINGS - Matheson et al v. Kaiser Aluminum
Corporation et al" for information regarding a pending lawsuit with respect
to the Proposed Recapitalization.
The decision to abandon the Proposed Recapitalization does not
preclude a recapitalization from being proposed to the Company's
stockholders in the future, including a substantially identical
recapitalization structure after the redemption or conversion of the
PRIDES. In the event that such a recapitalization were implemented in the
future, MAXXAM could retain a majority of the voting power of the Company
even if it substantially reduced its total holdings of the Company's equity
securities by more than two-thirds.
On October 23, 1996, KACC completed the Offering of $175.0 million
principal amount of the 10-7/8% Senior Notes at 99.5% of their principal
amount to yield 10.96% at maturity. The 10-7/8% Senior Notes rank pari
passu with outstanding indebtedness under the Credit Agreement and the
9-7/8% Senior Notes in right and priority of payment and are guaranteed on
a senior, unsecured basis by certain of the Company's subsidiaries. Net
proceeds from the Offering on the Issuance Date, after estimated expenses,
were approximately $168.9 million, of which $91.7 million were utilized to
reduce the outstanding borrowings under the revolving credit facility of
the Credit Agreement to zero. The remaining net proceeds (approximately
$77.2 million) were invested in short-term investments pending their
application for working capital and general corporate purposes, including
capital projects.
Operating Activities
At September 30, 1996, the Company had working capital of $398.4
million, compared with working capital of $331.7 million at December 31,
1995. The increase in working capital was due primarily to an increase in
Inventories and Prepaid expenses and other current assets and a decrease in
Accounts payable and Accrued salaries, wages, and related expenses,
partially offset by a decrease in Receivables and an increase in Other
accrued liabilities.
Investing Activities
Capital expenditures during the first nine months of 1996 were $91.1
million, which were used primarily to improve production efficiency, reduce
operating costs, expand capacity at existing facilities, and construct new
facilities, including the Company's first micromill which is nearing
completion in Nevada as a full-scale demonstration and production facility.
Total consolidated capital expenditures (of which approximately 6% is
expected to be funded by the Company's minority partners in certain foreign
joint ventures) are expected to be between $130.0 and $160.0 million per
annum in each of 1996 through 1998. Management continues to evaluate
numerous projects all of which require substantial capital, including the
Company's micromill project and other potential opportunities both in the
United States and overseas. In response to lower aluminum and alumina
prices, management may consider deferring certain non-essential capital
expenditures and/or raising investment capital (including through joint
ventures), in order to conserve a portion of the Company's available cash
resources to meet incremental capital and operating requirements and to
take advantage of new investment opportunities.
During July 1996, the directors of Yellow River Aluminum Industry
Company Limited (the "Joint Venture"), a Sino-foreign joint equity
enterprise organized under the law of the People's Republic of China
between Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of
KACC, and Lanzhou Aluminum Smelters ("LAS") of the China National
Nonferrous Metal Industry Corporation, KYRIL and LAS reached an agreement
(i) that extended until early 1997 the time for KYRIL to make a second
capital contribution to the Joint Venture, and (ii) that KYRIL would
continue to explore various methods of financing any future capital
contributions to the Joint Venture, including financing that could be
obtained from third-party investors.
Financing Activities and Liquidity
At September 30, 1996, the Company had long-term debt of $858.4
million, compared with $749.2 million at December 31, 1995. At September
30, 1996, $141.9 million (of which $73.1 million could have been used for
letters of credit) was available to KACC under the Credit Agreement. On a
pro forma basis, after giving effect to the Offering and the application of
proceeds therefrom, as of September 30, 1996, the Company would have had
long-term debt of $901.3 million, $273.1 million of borrowing capacity
would have been available for use under the Credit Agreement, and the
Company would have had additional available cash proceeds from the Offering
of $37.7 million.
During the nine months ended September 30, 1996, total borrowings and
repayments under the revolving credit facility of the Credit Agreement were
$468.7 million and $350.6 million, respectively. During the nine months
ended September 30, 1995, total borrowing and repayments under the
revolving credit facility of the Credit Agreement were $481.9 million and
$426.3 million, respectively.
Loans under the Credit Agreement bear interest at a rate per annum, at
KACC's election, equal to a Reference Rate (as defined) plus a margin of 0%
to 1.50% or LIBO Rate (Reserve Adjusted) (as defined) plus a margin of
1.75% to 3.25%. The interest rate margins applicable to borrowings under
the Credit Agreement are based on a financial test, determined quarterly.
During the first two quarters of 1996, the Company paid interest at a rate
per annum of the Reference Rate plus 0% or LIBO Rate plus 1.75%. During
the third quarter of 1996, the per annum interest rates increased by .5% to
the Reference Rate plus .5% or LIBO Rate plus 2.25%. Effective October 1,
1996, the margin applicable to loans under the Credit Agreement increased
by an additional.5% per annum based on the financial test.
Management believes that the Company's existing cash resources,
together with cash flows from operations and borrowings under the Credit
Agreement, will be sufficient to meet its working capital and capital
expenditure requirements for the next year. Additionally, with respect to
long-term liquidity, management believes that operating cash flows,
together with the ability to obtain both short and long-term financing,
should provide sufficient funds to meet the Company's working capital and
capital expenditure requirements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings
Aberdeen Pesticide Dumps Site Matter
In May 1996, the Environmental Protection Agency (the "EPA") urged
KACC to rejoin the respondents who are parties to a PRP Participation
Agreement (the "Group") and indicated that it would consider seeking
penalties against KACC if it did not. On October 10, 1996, the EPA
notified KACC that it deems KACC to be in violation of Administrative
Orders issued by the EPA under Section 106(a) of CERCLA ordering the
respondents, including KACC, to perform the soil remedial design and
remedial action described in the Record of Decision for the Aberdeen
Pesticide Dumps Site (the "Sites"). KACC and certain members of the Group
have entered into an agreement with the United States Department of Justice
to engage in a mediation process regarding an appropriate allocation of
responsibility for response costs at the Sites. KACC has also agreed to
fund a portion of the costs associated with certain work at the Sites during
the mediation process. See Part I, Item 3. "LEGAL PROCEEDINGS -
Aberdeen Pesticide Dumps Site Matter" in the Company's Report on Form 10-K
for the year ended December 31, 1995 (the "Form 10-K").
Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation
and James L. Ferry & Son Inc.
On July 8, 1996, the United States District Court for the Northern
District of California issued an order awarding the City of Richmond, et
al. (the "Plaintiffs") nominal costs, which amount has been paid. The
order also awarded Catellus Development Corporation ("Catellus") de minimis
costs. Catellus has filed a notice of appeal. On August 12, 1996, the
Court issued an order granting the Catellus motion for attorneys' fees in
the amount of approximately $.9 million. KACC and Catellus have filed
notices of appeal with respect to the attorneys' fees award. Based on
KACC's estimate of future costs of cleanup, resolution of the Catellus
matter is not expected to have a material adverse effect on the Company's
consolidated financial condition, results of operations, or liquidity. See
Part I, Item 3. "LEGAL PROCEEDINGS - Catellus Development Corporation v.
Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son Inc." in
the Company's Form 10-K and Part II, Item 1. "LEGAL PROCEEDINGS - Catellus
Development Corporation v. Kaiser Aluminum & Chemical Corporation and James
L. Ferry & Son Inc." in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 (the "First Quarter 10-Q").
Waste Inc. Superfund Site
KACC has now entered into a Participation Agreement with thirteen of
the respondents to perform the work required under the unilateral
Administrative Order for Remedial Design and Remedial Action issued by the
EPA under CERCLA to thirty-two respondents, including KACC, for remedial
design and action at the Waste Inc. Superfund Site at Michigan City,
Indiana. See Part I, Item 3. "LEGAL PROCEEDINGS - Waste Inc. Superfund
Site" in the Company's Form 10-K.
Other Proceedings
Matheson et al v. Kaiser Aluminum Corporation et al.
On August 29, 1996, the Delaware Supreme Court upheld the preliminary
injunction and remanded the case to the Court of Chancery. On September
24, 1996, the plaintiffs filed a motion to make permanent the temporary
injunction issued on April 8, 1996. On September 27, 1996, the Company's
Board of Directors adopted a resolution abandoning the Proposed
Recapitalization. On October 2, 1996, the Company filed a motion in the
Delaware Court of Chancery to dismiss the shareholder litigation relating
to the Proposed Recapitalization on the ground of mootness and filed a
response to plaintiffs' motion for entry of a permanent injunction. The
Court has not ruled on either motion. See Part I, Item 2. "MD&A -
Liquidity and Capital Resources - Capital Structure" of this Report and
Part I, Item 3. "LEGAL PROCEEDINGS - Matheson et al v. Kaiser Aluminum
Corporation et al" in the Company's Form 10-K, Part II, Item 1. "LEGAL
PROCEEDINGS - Matheson et al v. Kaiser Aluminum Corporation et al" in the
Company's First Quarter 10-Q and Part II, Item 1. "LEGAL PROCEEDINGS -
Matheson et al v. Kaiser Aluminum Corporation et al" in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the
"Second Quarter 10-Q").
Hammons v. Alcan Aluminum Corp. et al
On July 18, 1996, the plaintiff filed a notice of appeal to the United
States Court of Appeals for the Ninth Circuit appealing the summary
judgement granted by the United States District Court for the Central
District of California in favor of KACC and other defendants and the
Court's dismissal of the complaint as to all defendants. See Part I, Item
3. "LEGAL PROCEEDINGS - Hammons v. Alcan Aluminum Corp. et al" in the
Company's Form 10-K, Part II, Item 1. "LEGAL PROCEEDINGS - Hammons v. Alcan
Aluminum Corp. et al" in the Company's First Quarter 10-Q and Part II, Item
1. "LEGAL PROCEEDINGS - Hammons v. Alcan Aluminum Corp. et al" in the
Company's Second Quarter 10-Q.
Asbestos-related Litigation
KACC is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of
their injuries were caused by, among other things, exposure to asbestos
during, and as a result of, their employment or association with KACC or
exposure to products containing asbestos produced or sold by KACC. The
portion of Note 4 of the Notes to Interim Consolidated Financial Statements
contained in this report under the heading "Asbestos Contingencies" is
incorporated herein by reference. See Part I, Item 3. "LEGAL PROCEEDINGS
- - Asbestos-related Litigation" in the Company's Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
4.1 Sixth Amendment to Credit Agreement, dated as of October 1, 1996,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among the Company, KACC, the financial institutions a
party thereto, and BankAmerica Business Credit, Inc., as Agent.
4.2 Indenture, dated as of October 23, 1996, among KACC, as issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill
Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas
Micromill Holdings, LLC and Kaiser Texas Sierra Micromills, LLC,
as subsidiary guarantors (the "Subsidiary Guarantors"), and First
Trust National Association, as Trustee regarding KACC's 10 7/8%
Senior Notes due 2006.
4.3 Registration Rights Agreement, dated as of October 23, 1996,
among KACC, the Subsidiary Guarantors and the initial purchasers
of KACC's 10 7/8% Senior Notes due 2006.
10 Employment Agreement made and entered into as of September 1,
1996, by and between KACC and Jack A. Hockema.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the quarter
ended September 30, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized, who has signed this report on
behalf of the registrant and as the principal financial officer of the
registrant.
KAISER ALUMINUM CORPORATION
/s/ John T. La Duc
By:________________________
John T. La Duc
Vice President and
Chief Financial Officer
/s/ Arthur S. Donaldson
By:________________________
Arthur S. Donaldson
Controller
Dated: November 7, 1996